On Wednesday next week the Fed will decide whether or not to change its forward guidance from the ‘considerable time’ language to a guidance linking it to the economic developments and how close the Fed is to its economic goals of 2% inflation and full employment. The soft payrolls report on Friday last week cooled down expectations for a change in the statement but subsequent Fed talk from, for example, Fed dove Rosengren suggests that it is still very much on the table. His comments come following a period of a wide range of Fed members expressing discomfort with the current time-dependent guidance and we could very well see more dissenters at next week’s meeting if there is not a change to guidance (see box on next page). Below we have made a scoreboard between Fed hawks and doves based on the latest developments.
Fed scoreboard: hawks versus doves
Supportive factors for the hawks
• Labour market indicators improving. While the employment report for August was disappointing, most other indicators point to a strengthening labour market (see Monitor – US: Job growth is strengthening). The unemployment rate also continues to trend lower and at the current pace of decline it will hit the Fed’s 5.4% estimate for long-run unemployment in Q2 15.
• ISM indices signal very strong growth in H2. Both manufacturing and non-manufacturing are around the highest levels in 10 years, suggesting that the economy is gaining momentum going into H2.
• Investment orders have picked up. Capex was soft in 2013 and the early part of 2014 but the latest order and shipment data points to an acceleration in corporate investments.
• Housing recovering. The Fed has pointed to downside risks from housing over the past quarters but more and more evidence suggests that housing is recovering again (sales, sentiment, construction spending).
• Asset valuation is getting stretched in high-yield market. Janet Yellen have mentioned it in several speeches, but in particular Fed hawk Richard Fisher has highlighted this. On 4 September, he said in a speech that “I have been involved with the credit markets since 1975. I have never seen such ebullient credit markets”.
• Market pricing continues to undershoot Fed projections. As highlighted by a San Francisco Fed paper this week, the markets and the public continue to undershoot the Fed’s own projections for the Fed funds rate. This may indicate a need to make a further hawkish twist to get market pricing more aligned with the Fed’s own view.
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